At the beginning of the century, the US actually has a balanced budget. The failure to match higher defense and mandated healthcare expenditures with revenues not only eliminated the surplus, but led to the largest deficits in history.

Americans have long been eager consumers and home owners. But there is no doubt we collectively overdid it during the years leading up to the financial and economic crisis of 2008. The personal savings rate dropped close to zero. Mortgage indebtedness grew to new (and ultimately unsustainable) heights.

All that occurred as real income for average American households rose little if at all. That’s not supposed to happen in a growing, productive economy. High consumption maintained at the expense of saving and increasing indebtedness simply could not be sustained in the face of the stalled income of the “99 percent.”

At the beginning of this century, we actually had a balanced federal budget. Then the failure to match higher defense and mandated health care expenditures with revenues not only inexorably eliminated the surplus but led to the largest peacetime deficits in history even before the recession. With little or no private savings, by mid-decade we were relying on borrowing from abroad to finance both public and private expenditures. China, Japan, and other emerging nations were perfectly happy to supply our consumers with the goods they wanted and to take dollars in payment. They kept it up, even as dollar interest rates descended toward zero.

Our dependence on external financing reached levels of $500–600 billion a year, 5 percent or more of our GDP, which was well beyond any historical patterns. Happily, as a nation, and as a government, we have been able to continue to borrow abroad right through the recession. But can we count on doing that indefinitely?

Of course not.

We look upon ourselves, with some justice, as a great country, the strongest and richest in a changing and troubled world, a place of stability and leadership. But now our country is mired in debt. It is dependent on large continuing flows of capital from abroad, without much savings of its own and with slow growth and household income flat. Those are not characteristics of a country willing and able to prolong its global leadership.

We need to rebalance the economy—to achieve more productive domestic investment and more personal savings—and to turn around the enormous federal deficits. That’s all the more difficult with high unemployment and dependence on stimulus programs.

Here and there, a few hopeful signs emerge, including some spending cuts. But as with financial reform, the effort is incomplete. In fact, it has barely started. And the whole world knows it.